The impact of Russia‘s economic crisis on Azerbaijan

Hardly anyone could expect a 33,4% devaluation of the Azerbaijani Manat by the Central Bank in one night. Officials explain that decision with the low oil prices and the “current global economic crisis”. Of course, this may increase ‘manat flow’ into the state budget, which was calculated based on an oil price of $90 per barrel, and 1 USD/AZN rate in 2015 budget was accepted at 0,7844. Forced devaluation provided by the government clearly confirms the fact of sharp dependence of the Azerbaijan economy on the oil factor. However, energy market situation is not the only reason of current crisis in the country, and one the factors, affecting negatively, is crisis in Russian economy, Azerbaijan’s biggest import partner, where up to 3 million Azerbaijanis are living.

In 2014 bilateral trade between Russia and Azerbaijan has dropped by 24% to $1,955 billion (export – $640,27 million; import – $1314,48 million). Export decreased significantly, by 40,6%, that was mainly caused by lowering purchasing capacity in Russia, as well as, the rouble devaluation, that makes Azerbaijani small business export products ‘weak’ in price competition. Despite that in 2014 Russian Federation remained Azerbaijan’s biggest import partner, and the tenth biggest export partner.

However the role of Russian crisis in current economic situation is miserable, since main negative factors are inefficient economic structure, weak competition, low level of diversification, and low oil prices in midterm. According to official data GDP growth rate in 2014 was 2,8%. The European Bank for Reconstruction & Development (EBRD) forecasted the economic growth in Azerbaijan from 3.0% to 1.5 % for 2015. According to CESD’s calculations and predictions the growth will be 1.0 % due to sharp decline in the crude oil prices. Until recently the international reserves, petrodollars, acted as the only ‘safety bag’ of Azerbaijan economy against crisis, and now the ability of economy to rehabitation is extremely low due to high level of monopolization and the lack of efficient market relations.

Obviously the monetary system has also been influenced negatively by the factors mentioned above. Since 30.01.2013, the USD/AZN rate has been varying around 0.7844. Nevertheless, in 2013 Azerbaijan’s Central Bank (CBAR) spent $1.2 billion of its reserves to defend the manat’s stability. In the current situation, oil prices around $60 will seriously force pressure on Azerbaijan manat. Thus, within the last three months, the Central Bank has already spent 20% of its reserves, to support azerbaijan manat. Now, the scale of official foreign exchange reserves of CBAR is $11,004 billion.

Since year beginning state officials had expressed confidence that citizens’ income and social welfare wouldn’t be affected by low oil prices, however at 21 February night CBAR devalued the manat without any warning by almost 35% to the dollar.

It should be noted, earlier monetary authorities were persuading the people that there were not any fundamental reasons for sharp devaluation of national currence, in addition, the manat would be devalued gradually. Consequently a sharp phase of devaluation was expected to happen by late July, after an important event for the country, the 1st European Games ‘Baku 2015’.

The points mentioned above are direct evidence of the fact that manat was supported not by real economic and industrial potential, as it was being declared, but by CBAR’s “artificial respiration”.

Taking into account that Azerbaijan economy depends mainly on oil prices, and is not affected seriously by Russian crisis, non-oil sector development would create a real backup to support national currency. In order to achieve this goal the government has to realize an efficient investment policy to attrack private investment that will improve competitive branches of economy.

The volume of investments to Azerbaijan economy in 2014 decreased by 1.5 % to $22,435 billion. Meanwhile, 66.1% of all investments, in other words about $14,494 billion was directed to non-oil sector. The share of foreign investment in non-oil sector reaches $1,059 billion, which is 7.3% of total investment in non-oil sector. According to official statistics Azerbaijan has invested in Russian economy approximately $1.8 billion, particularly to real estate and oil-and-gas sector. The State Oil Fund of the Republic of Azerbaijan (SOFAZ) has invested in Russian housing and stock markets as well.

As a result of the ruble’s devaluation, 500 million USD was invested in JSC «VTB Bank» shares by SOFAZ, on 21 May 2013, shows impairment of 34.93% and on 10.02.2015 the market value of investment decreased to $325,346 million. It should be emphasized that the ruble weight in Fund’s investment portfolio shares less than 1%, which is long-term investment. More than 570 Russian capital based companies are operating in Azerbaijan.

At present, up to 3 million Azerbaijanis live in Russia, and 570.493 of them are azerbaijani citizens. According to the Russian Federal Migration Service, the number of Azerbaijanis that left Russia in the last 6 months of 2014, reached 28.196. Devaluation of the ruble and patent system are the main reasons why migrant workers leave the country.

Vast majority of Azerbaijanis leaving for Russia are from regions. Based on official datas, remittences from Russia, is 1.5 billion USD per year (unofficial estimate is $3 billion). A sharp decline in remittences was observed in the second half of 2014, and it’s predicted to drop by 30% in 2015.

Money transfers amount 1.3% of GDP (total GDP 2014 is $75 billion), and it shares just only 4% of the budget expensed. The decline in remittances has negatively affected the families’ income and welfare in the regions. Therefore, a decrease in the regions’ CPI has been recorded. On the other hand, the lower remittances will insignificantly decrease the revenues in the Banking Sector.

Despite all unfavorable conditions, Azerbaijanis living and working in Russia, hope for refinement of the situation soon and are not hurry to return to homeland. Another reason for this decision is the higer unemployment rate in the regions, although the statistics says the unemployment rate in Azerbaijan is close to 4.9%. From another view point, there is a strong influx of people to Russia from the Northern border regions of Azerbaijan. However, most of them pass the border just for one day to do purchases.

The investigation regarding Housing field proofs that about 1/3 of total demand in real estate market of the country falls on azerbaijanis, living and working in CIS, especially in Russia. Currently these people aren’t able to create huge demand in Azerbaijan housing market because of their getting worse business activity in Russia. Since May 2014, a significant decline is observed in Russian azerbaijanis’ investment in local market. As against October 2013, the downturn in October 2014 was more than 30%.

Also the majority of Azerbaijanis living and doing business in Russia who owned appartments in Baku, and in order to overcome the current difficulties, they’ve already begun to sell their properties in Azerbaijan. From other side, there is increasing demand in real estate market after the manat devaluation, insofar as people are interested in saving their money from the further ‘weakening’ of national currency by purchasing property objects. This caused an increase in real estate prices, so in February a 2,13% average rise was observed.

Despite the fact that EU is major economic partner of Azerbaijan, relations with Russia play an important role in the social life of the country. Meanwhile Azerbaijan implements large investment projects in Turkey and Georgia. Concerning political reorientation, the government’s balanced foreign policy (between West and Russia) still remains a priority, as Russia at least a regional power, and it has close socio-economic relations, as well as political attitude with Azerbaijan. Moreover, Russia is a OSCE Minsk Group’s co-chair on peaceful solution to the Nagorno-Karabakh conflict, on which the UN Security Council adopted 4 resolutions in 1993. As mentioned above, Azerbaijan also has close relations with Europe and USA, however these relations are basically built on mutual economic interest.

March 2015

The research was supported by Friedrich-Ebert-Stiftung

The views expressed in this article are not necessarily those of the Friedrich-Ebert-Stiftung